How to Buy a House When You Have Too Much Debt

When you fill out a mortgage application, lenders look for income to offset debt. If your monthly debt payments consume too much of your income, you may have a tough time qualifying for a home loan.

Underwriting, which is the decision-making of whether or not to grant credit, determines what your income is with supporting documentation like pay stubs, W-2s and tax returns. (It also looks at your credit scores to decide whether you qualify. You can get your two free credit scores, updated every 14 days, on Credit.com.)

Fortunately, a lender may be willing to look at more than just your regular salary when it comes time to calculate your debt-to-income ratio. Here are various forms of income most mortgage banks will sign off on.

1. Annuities

If you’re eligible, you can purchase an annuity, a contract sold by a life insurance company that provides regular monthly income in return for an initial lump-sum deposit.

The income derived from this annuity will be used to determine how much mortgage and/or house you can qualify for. An annuity can be brand new — you need not have a long history of this income as long as it’s set to continue for the next 36 months or longer.

2. Social Security Income

If you’re eligible for Social Security, you might want to consider taking it early as this income can easily be used to help you qualify for a mortgage. You may be also able to “gross up” this income by up to 1.25%, depending on whether or not you pay taxes on it.

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3. Notes Receivable

Generally, you’ll need to earn income from a note receivable (a credit extended to a business) for at least 6 months for it to count on a mortgage application. Notes receivable income has to be based on the market rate and it’s the interest on the note that is used to determine your eligibility for your desired borrowed amount. For example, if you have a note receivable at 5.5% based on a principal balance at $50,000 that income would be $229.16 per month used for a mortgage.

4. Purchasing a Rental Property

If you are looking to purchase a rental property, you’re in luck. You can use projected fair market rents to qualify for its mortgage. Lenders will use up to 75% of gross market rents to offset the mortgage payment. In other words, because the renters are making the mortgage payment, you don’t need to earn as much to get a green light on your loan application.

5. Renting Your Current Home

If you are trying to buy a new primary residence, but don’t have enough income to support two mortgage payments, you can rent out the property. A rental agreement and tenant security deposit allows you to offset the mortgage payment on your current home to qualify for a mortgage on a new home. The concept is almost identical to purchasing a rental property, with the exception of needing to have a rental agreement in place for your current home.

6. Self-Employment Income

A history of self-employment income is required for it to count on your mortgage application. Generally, Schedule C Sole Proprietor income needs to be in place for at least 12 months in order for that income to count. Note: If you have been self-employed for the past two years and you had one bad year, followed by a good year, your income will be averaged by your lender.